08/13/2012

The Single Most Important Thing You Can Do to Reduce Your Taxes

It's simple. Keep track of all the hours you work in your home on family child care business activities when no day care children are present.

Do this for at least two months each year.

Unfortunately, many family child care providers don't keep such records.

I was reminded of this while talking today with a Minnesota family child care provider who is being audited by the IRS. She cared for children from 6:00am to 5:30pm Monday through Friday. Her auditor was going to allow her to claim twelve hours a day when calculating her Time-Space Percentage.

Your Time-Space Percentage is based on the hours you work in your home (hours children are present plus hours you work in your home doing business activities after the children are gone) and the number of rooms you use on a regularly basis for your business.

I asked her if she worked more than an extra half hour a day on other business activities after the children were gone. She said "yes," but she had kept no records of these hours of work. Her failure to keep these records could cost her hundreds of dollars in her audit.

Most of the child care providers I help with their IRS audit are in a similar position. They have attendance records and Food Program records to show when day care children are in their care, but they have no records to show their work activities after the children are gone.

Why This is Important

Keeping these records is important! You can count hours spent cleaning, activity preparation, meal preparation, time spent on the Internet, parent interviews, talking to parents on the phone, and so on. See my article for a comprehensive list of activities you can count.

Every hour a week spent on these activities will increase your Time Percent by 1%. This may not seem significant, but it is.

You will be applying your Time-Space Percentage to all expenses used for both your business and your family. This includes property tax, mortgage interest, utilities, house insurance, house repairs, house depreciation, toys, supplies, furniture, appliances, and so on. This could easily total more than $20,000. One percent of $20,000 is $200. This means your business deductions would increase by $200 for every hour a week you spend on these activities.

The average number of hours that family child care providers work after children are gone is 13.9 hours a week*. That is equal to 8.3% of the hours in a week (168 hours). If you spent 13.9 hours each week on these activities and had $20,000 of shared expenses, you could deduct an additional $1,660 in business deductions ($20,000 x 8.3% = $1,660).

What Should You Do Now?

Start keeping track of these hours for two months before the end of the year. Use your average number of hours for the other ten months of the year. Keep doing this every year.

I told the provider over the phone to start tracking these hours as of today for the next two months. I also told her to reconstruct what hours she worked in 2010 and 2011 (the years she was being audited): "Write down in great detail what you do each morning to get ready to greet the children (preparing breakfast, laundry, sweeping floors, etc.). Do the same thing for after the children leave, in the evenings and on weekends."

Then she can argue to her auditor, "Here's what I did to reconstruct my hours for 2010 and 2011. I've also been tracking it for the past few weeks in 2012 and the hours I'm working each week now on these activities are consistent."

Because most providers who I assist with their audits didn't keep careful records, we are forced to do this reconstruction and make this argument. In other audit cases I have handled, we usually win some of these hours, but usually not all of them. This means these providers are not getting to claim all of the hours they worked. As a result, they paid more in taxes than they should have.

Don't underreport your hours on your tax return. Two months of careful recording keeping each year will make a big difference.

And I'm not exagerating when I say that doing so is the single most important thing you can do to reduce your taxes!

If you have an exclusive use room(s) for your business in the home you live in you still need to track the hours you use your home for your business. If you did child care in a different building, then you would not.

Tom, you mentioned that you can not deduct lawn mowing. However, we try to mow twice a week to keep the grass short as to not give mosquitos & nats a place to live. We have several children in care who react severly to their bites and it is State regulations that you take kids outside daily if possible. So is it ok to deduct one of our two mowings per week? Would I have to have a picture of a swallon eye shut,child for records or would a doctors statement of visits on record work because they have to take antibiotics when the bites turn into infection?

Dear Tom: We own a two-family home and rent the top apartment, meanwhile we live in the bottom apartment and use 70% of the area for our group family day care. Do we calculate the total area used based on both floors or just the bottom floor, where we live and work? Thanks Javier

Dear Tom
I am open 7 days a week from 6am to 11pm
I sometimes only have children until 9:45pm
I take children in emergencies and hourly care until 11pm can I claim the hours I am open versus hours children are in care
Thank you Teresa